What is counterparty risk? 

Physical gold and silver have no counterparty risk. So what is counterparty risk? 

Counterparty risk, is the risk of one or more parties in a financial transaction defaulting on or otherwise failing to meet their obligations on that trade. 

Counterparty risk is with us in everyday life, when investing or making transactions. It is the probability that the other party in a trade, investment or credit transaction might default on the contractual obligation, therefore not fulfilling its part of the deal. 

It is also in investments we make in financial products such as stocks, bonds, and derivatives. These also carry counterparty risk. 

Whether you like it or not, our lives are in this contractual world. 

You have to stop and think, do both parties always live up to their obligations?

You may have made an investment in a company or stock and that company has gone bankrupt? (Hertz for example). 

Another example is the default of so many CDO’s (collateralized debt obligations), which was a major cause of the real estate collapse and in turn, the global financial crisis in 2008.

With this in mind, any currency, any debt, any equity has counterparty risk. 

These promises could be broken in many ways, such as a default on a payment (not paying the money back), fraud, or slowly broken through the debasement of a currency (printing more of it). 

All fiat currencies are backed by credit (loans) on a bank’s balance sheet. If there is a major default on these loans, this can lead to bank runs and bank failure (Northern Rock for example). 

Counterparty risk is all around us in daily life. 

You trust that your credit or debit card will work when you buy goods in a shop, you trust that you will be paid on pay day, or an invoice for work done will be paid. You trust that the cheque or money you put in a bank will be there when you want to withdraw it. The shop you bought your goods from, must also have the same trust in a bank or a credit card provider. 

All these have counterparty risk and can fail. 

Physical gold and silver have no counterparty risk. Gold and silver are tangible assets. They do not derive their value from anything else as they have value in themselves. With gold and silver, an exchange is eradicated the moment the goods and gold, silver change hands. 

Physical gold and silver have been traded for thousands of years. They are a safe form of investment and protection of wealth, especially during times of uncertainty. 

Gold and silver can be traded easily, anywhere across the world. 

Gold and silver are real tangible assets. You can physically touch gold and silver and they have a known market spot price worldwide. 

Gold and silver are unable to go bankrupt, They are unable to default on payment, as you can sell gold and silver at any time knowing that the price of gold or silver will never go to zero, unlike many paper assets.

Gold and silver do not need a board of directors, or become victims of scandals or mismanagement. 

Counterparty risk can be a huge risk in other standard investments such as equities, therefore, gold and silver are superior when it comes down to risk. 

Gold and silver have no counterparty risk. 

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Gold and Silver UK
goldandsilveruk is a precious metals enthusiast who wants to give authentic, clear, simple, transparent information and opinion to readers.